It was neither massive federal spending during the Depression nor even more massive federal spending during World War II that ended the Great Depression.
That’s what I was taught in school and what most people believe today.
Stephen Moore explains the WWII part of the falsehood in his article How did the Gret Depression actually run its course?
FDR and his whiz kids were totally convinced that the economy would completely collapse after the end of the war. They planned but fortunately did not implement a New Deal II. Doing so would have strangled the economy, perhaps for yet another decade.
Here is the conclusion to the article:
In sum, it wasn’t government spending, but the shrinkage of government that finally ended the Great Depression. That’s what should be in every history book — but isn’t.
There was another recession in 1937 that choked off a flicker of life in the economy.
In 1940, unemployment was 14.6%. That stat by itself should forever destroy the idea that the New Deal ended the Great Depression. That one out of seven workers couldn’t find a job is a severe indictment of the New Deal.
Pulling 12 million men out of the workforce and putting them in uniform would go a long way to fixing the imbalance between workers and jobs. However, they did not contribute anything productive to the economy.
Here’s my analogy. To think that making fighters and carriers and tanks to send bombs and bullets and torpedoes toward the enemy is building the economy is like saying that having everyone put a hammer through their computer screen every seven days is improving the economy.
Drilling a hole in your week-old smart phone is wasteful, just like building another million bombs to drop on Germany.
Let Mr. Moore track federal spending as a percent of GDP. That would be the amount of national output that is goes to the feds.
In 1940, the federal share was 12%. That skyrocketed to over 40% in ’43 to ’45. Almost half of everything the country produced went into war materiel. That’s half of the national output that citizens never got to enjoy or put to further productive use. It was gone.
Federal spending collapsed from 41% of GDP in ’45, to 24% in ’46, to a mere 15% in ’47.
Keynesian economics tells us the economy should have collapsed into a puddle, shrinking to smaller than the deepest, darkest part of the Depression.
What actually happened?
There was an eight month recession. Insignificant compared to the 16 years of suffering that preceded it.
Look at these stats:
Personal consumption grew by 6.2 percent in 1945 and 12.4 percent in 1946 even as government spending crashed. At the same time, private investment spending grew by 28.6 percent and 139.6 percent.
By 1946 the unemployment rate was under 4%. It stayed in that range for a decade.
The economy recovered from the Great Depression when federal spending fell and the economy was freed up to do its thing naturally. That’s what ended the Depression.
Check out the article for more details.